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Capital FailureRebuilding Trust in Financial Services$
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Nicholas Morris and David Vines

Print publication date: 2014

Print ISBN-13: 9780198712220

Published to Oxford Scholarship Online: October 2014

DOI: 10.1093/acprof:oso/9780198712220.001.0001

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Systemic Harms and the Limits of Shareholder Value

Systemic Harms and the Limits of Shareholder Value

(p.234) 11 Systemic Harms and the Limits of Shareholder Value
Capital Failure

John Armour

Jeffrey N. Gordon

Oxford University Press

The generally accepted framework for analysing corporate law and governance implies that those running a corporation should seek to maximise shareholder value as measured by the stock price. However for share price maximisation to enhance social welfare, a range of mechanisms—contracts, liability rules, and regulation—need to ensure that any costs which a firm’s activities impose on other parties are internalised into the profit function. The extent to which traditional private law mechanisms—in particular, the law of tort—fail to internalise ‘economic’ or indirect harms has been underappreciated. The case of banks illustrates dramatically the problems caused by the maximisation of shareholder value, because bank risk taking has a systemic, as opposed to firm-specific, character. The chapter proposes a corporate governance solution, using ‘old-fashioned’ liability rules to affect the pay-offs of those controlling the firm, as opposed to external measures designed to affect the firm’s profit function.

Keywords:   shareholder value, tort law, systemic effects, corporate governance, liability rules, director’s liability, financial services

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